House readies temporary debt-ceiling hike

Vote slated for Wednesday, but longer-term deal still tricky

WASHINGTON (MarketWatch) — The Republican-controlled House plans to vote Wednesday to effectively increase the U.S. debt ceiling until May 19, a move that would reduce jitters in financial markets and buy time for the Congress and White House to craft a longer-term extension.

The Obama administration on Tuesday said it would accept a three-month increase, laying the groundwork for the Democratic-led Senate to strike a deal with the House.

The U.S. breached the debt ceiling — a limit on how much debt the government can accumulate — at the end of 2012, according to the Treasury Department. Treasury has been using what it calls “extraordinary measures” to pay the government’s bills and avoid a calamitous default, but the department says it will run out of options by mid to late February.

The last stalemate over the debt ceiling in the summer of 2011 sent U.S. stocks reeling, slowed the economy and scared global investors. No one in Washington wants to see a repeat, but the grounds for a long-term compromise could prove elusive once more. Republicans insist on significant spending cuts while Democrats want to raise taxes on the wealthy again .

The House bill, meanwhile, drew complaints from Democrats who objected to the conditions attached. It would require both the House and Senate to pass budget blueprints by April 15 or lawmakers would have their salaries withheld — what Republicans tout as “no budget, no pay.” Read House bill here.

The Senate hasn’t passed a budget blueprint since 2009 despite a longstanding law that requires one each year.

The House move is meant to put pressure on the Senate by forcing Democrats to decide whether they will support higher taxes or spending cuts to help reduce federal deficits. A handful of senators from states that voted for Mitt Romney in the last presidential vote are up for election in 2014.

Senate Democrats have been able to skirt politically risky votes over the past few years simply by not producing a budget, leaving the spotlight on House Republicans.

The glare has been harsh. Republicans have gotten more blame than Democrats in all three financial standoffs since 2010. In each case, they drew a hard line but were later forced to cave in.

House Speaker John Boehner of Ohio, and House Majority Leader Eric Cantor of Virginia speak to the media on Republican efforts on the "fiscal cliff" in a briefing late last year.

The debt ceiling, created before the onset of World War Two, has been raised 78 times since 1940 under Democratic and Republican presidents alike. Congress is required to approve an increase each time the federal debt is set to exceed the limit. Read history of U.S. debt limit.

The U.S. government technically breached its $16.4 trillion borrowing limit on Dec. 31. Absent an increase, the Treasury could run out of money to pay the nation’s bills — things like Social Security payments, veteran benefits and interest payments on government debt.

The House bill doesn’t actually raise the debt limit, it merely suspends it. House Republicans wanted to avoid a vote for a specific increase that could come back to haunt them in future elections. Votes to raise the limit are generally unpopular with the public and are particularly disliked by fiscal conservatives.

The two parties would still face a tough task to produce a long-term deal, barring a compromise that alienates hardcore supporters on both sides.

Republicans have publicly ruled out any more tax increases, still smarting from a year-end showdown with Obama. The president won an increase in tax rates on wealthy Americans in a late-hour deal passed on New Year’s Day.

“Before there is any long-term debt limit increase, a budget should be passed that cuts spending,” House Speaker John Boehner, R-Ohio, tweeted on Tuesday.

Democrats, for their part, want more tax revenue and don’t believe major spending reductions are necessary. The tax increases on the wealthy at the start of 2013 are not enough, they say.

“We all know where we need to end up,” said Rep. Ron Kind, D-Wisc. “We’ve just got to figure out a way to get there.”

The still-fragile U.S. economy could be susceptible to more damage unless the two parties avert another showdown, economists and business leaders have warned.

“If we don’t pay our bills we will disrupt our economy and send unemployment higher,” MIT professor Simon Johnson said at a House hearing on Tuesday on the debt ceiling.

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